Melnyk tells hearing he was rarely hands-on at Biovail

Biovail Corp. founder Eugene Melnyk took the stand Monday in the Ontario Securities Commission’s case against him and portrayed himself as a high-level “strategist” with little direct knowledge of the inner legal and financial workings of the pharmaceutical company and a reluctance to second-guess skilled experts he hired as subordinates.

But given the first chance to question the man at the centre of the regulator’s year-old case against Biovail, OSC lawyer Johanna Superina attempted to chip away at that explanation of events that led to the commission to file allegations against Mr. Melnyk and three other former employees, as well as the company.

Mr. Melnyk is alleged to have improperly blamed a 2003 revenue shortfall at Canada’s largest publicly-traded pharmaceutical company on a truck accident near Chicago.

During questioning by his lawyer, Kent Thomson, Mr. Melnyk said his formal education ended at Grade 12, when he “lost interest” following the death of his father, a doctor.

He went to work and ultimately founded or co-founded a series of companies that led to the creation of Biovail, with 2,000 employees and a market value of $3.4-billion.

“I was viewed in the company as the person who was more the strategist,” Mr. Melnyk told a three-person OSC panel that is hearing the case.

“I would surround myself, though, as we were a large company, with what I would expect to be the best and the brightest,” Mr. Melnyk said of his key employees who provided operations and financial information for earnings releases and regulatory filings.

“It was their responsibility to get it right. I wouldn’t be second-guessing them.”

Three former Biovail executives including the finance chief also faced OSC allegations but they, and the company, settled before the hearing began last month.

Late Monday, under cross-examination by Ms. Superina, a lawyer for the OSC, Mr. Melnyk acknowledged that he would occasionally skip over the chain of command and call subordinates directly to monitor business details.

It “would be a very rare occasion that I would do that,” such as to track shipments out of Biovail’s Steinbach, Man., plant as the end of a crucial third quarter approached, Mr. Melnyk said.

“So in some ways you had a hands-on management style?” Ms. Superina asked.

“In a crisis situation, yes,” Mr. Melnyk responded.

He told the OSC panel that he and other executives were aware in August of 2003 there was a “risk” Bioval would fail to meet third quarter revenue targets in 2003, in part because of production products related to new drug Wellbutrin XL.

However, he said he stepped in to address the manufacturing and packaging problems and no one at the company had concluded the financial target would be missed before the truck accident in October of 2003.

Mr. Melnyk described the aftermath of the truck collision as “pandemonium” at Biovail, where executives quickly made the decision to inform investors of the company’s first revenue shortfall in its history.

He said he delegated the job of compiling the numbers to finance chief Brian Crombie, while he fielded as many as 100 emails an hour at his office in Barbados and considered how to handle the revenue miss with bankers, investors and employees.

“He’s a very competent person. I trusted him,” Mr. Melnyk said of the Harvard-educated Mr. Crombie.

Still, while the revenue loss estimates attributed to the accident of up to US$20-million appeared reasonable to him, Mr. Melnyk said he asked “tough questions” of the finance chief.

“I said: ‘Brian, are you absolutely sure?’ I must’ve asked him two or three times.”

It wasn’t until sometime later, he said, that he learned Mr. Crombie’s calculations included the contents of three trucks even though only one was involved in the accident in the United States.

“To me it was almost unconscionable not to go out with as much information” as possible at the time, Mr. Melnyk said. “You owe it to your shareholders and stakeholders.”

The unacceptable alternative, he said, would have been to emerge “shielded behind a wall of lawyers a month later [or] two months later.”

Mr. Melnyk said a second press release on the earnings miss and the recovery of some product was issued only because a Bank of America analyst report published on Oct. 8, 2003, suggested the Biovail’s truck involved in the accident was empty when it was shipped.

“To suggest what he was suggesting was criminal,” Mr. Melnyk said, adding that the implication was that Biovail had sent out an empty truck and somehow “orchestrated” a fraud including a traffic accident that killed eight people.

“I’ve seen very vicious attacks on companies. I’ve never seen anything like this — ever,” Mr. Melnyk said, adding that the bank report generated headlines “across the world.”

The hearing was adjourned until Tuesday when Ms. Superina is to continue her cross-examination of Mr. Melnyk.